No. of Recommendations: 12
CHICAGO--(BUSINESS WIRE)-- Equity Commonwealth (NYSE: EQC) announced today that its Board of Trustees has declared a special, one-time cash distribution of $3.50 per common share which will be paid on October 23, 2019 to shareholders of record on October 7, 2019.

The new management at EQC also paid a special dividend of $2.50 in 4Q18. The 1099-DIV classified it as 100% ordinary income.

Hmmmmmm.

I pulled up CF data for EQC going back to 1Q14 when new managment wrested control from RMR. One of the more interesting REIT CF SpreadSheets I've ever done.

Since the takeover in 2014, Zell and Helfand have been systematically selling off properties. From 3Q14 through 2Q19, they've sold $5.2B out of $5.9B in properties, or about 89% of their holdings. The 1099-DIVs have looked interesting for the preferred dividend and 2018 special dividend:

2018: 100% ordinary income
2017: 100% Return of Capital (ROC)
2016: 100% Unrecaptured Sec 1250 (capital gains that represent recaptured depreciation)
2015: 100% ROC
2014: 100% Long Term Capital Gain

Just a guess, but the Oct Sp. dividend will likely be ordinary income and perhaps LTCG.

The chart of Revenue per share shows a steady decline beginning in 2015 as should be expected as rent paying properties are sold off. But CFFO/share over the past 4Q periods, net of preferred dividends, has shown a steady improvement going from $.14/share to $.20/share over past 4Q.

But the huge change is the interest expense. At the end of 3Q15, it was $25.1MM. For 2Q19 it had dropped to $4.1MM, which works out to be an interest to CFFO + Interest ratio of 14.7%, which is very low for a REIT. Clearly, asset sales have been going to debt retirement.

What kind of surprises me is the special dividend announcement looks like it was made after the market close yesterday, and I expected a sharp jump up in the opening share price today, but alas, this has not happened. Current price is about $33.90, up about $.45 or so. I'd guess the market was expecting this special dividend and so already priced it in.

Not sure if a quarterly dividend will be reinstated or they will continue with annual special dividends for the time being. But the trends here look favorable, so I just added 500 shares.

But with this REIT declining to annualized sales of $133.6MM, its quickly becoming a micro-stock. The C&CE at end of 2Q19 was about $3.1B, with about $427MM of that going out as a special dividend next month still leaves this REIT with around $2.7B in cash. Do they plan on redeploying this cash into income producing properties? From the most recent earnings call transcript, Helfand said...

Our strategy will continue to be informed by market conditions, and we will be patient and disciplined in our evaluation of a broad range of investment opportunities including non office asset classes. With $3.2 billion of cash, we’re well positioned to create long-term value for shareholders.

By my back-of-the-napkin calc, EQC has a net of $3,229MM in liquid net assets (net of debt and preferred stock) and with 122MM common shares, that pencils out to $26.44/share. The $7.60 premium, I'd imagine, is the managerial skills of Helfand and Zell, along with the ability to add income assets without issuing more dilutive stock and without adding debt. The current CF metrics certainly look much better and are trending in the right direction.

BruceM
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